Small claims, big issues

In August and September 2015 two important judgments were handed down in the case of A & Anor v Royal Mail Group concerning the recovery of success fees and after the event (ATE) insurance premiums from damages awards in claims brought on behalf of children and protected parties.

The proceedings arose from very ordinary ?facts. Two children, referred to as A and M, were innocent passengers in a car that collided with another vehicle driven by the defendant. It was uncontroversial that the accident was caused ?by the defendant’s negligence. 

Claims pursued on behalf of both children through the Ministry of Justice’s claims portal by their father – acting as their litigation friend – were settled by the defendant’s insurer for awards of damages of a little over £2,000 each. The awards comprised sums for general damages and past physiotherapy treatment. 

At a hearing on 27 May 2015, District Judge Lumb, the regional costs judge at Birmingham County Court, approved both awards under Civil Procedure Rules (CPR) part 21 with the defendant agreeing to pay the fixed recoverable costs of each claim. 

Both claims were funded by conditional fee agreements (CFAs) with 100 per cent success fees, together with ATE insurance. At the conclusion of the infant approval hearing, applications were made on behalf of the litigation friend for the deduction of the success fees and ATE premiums from the awards of damages. 

Since the watershed introduction of the ?Jackson Reforms, such applications have been commonplace in the context of such hearings. These applications have been met with varied judicial responses and have created frequent difficulties for claimant solicitors. 

The problems in respect of these applications originate from the changes brought by section 44 and section 46 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), which precluded the recovery of ATE premiums and success fees as costs from the losing party in civil proceedings. 

Though LASPO did not preclude a lawyer from recovering an ATE premium or success fee from their client’s damages award – subject to the maximum cap of 25 per cent of general damages and past special damages under the Conditional Fee Agreements Order 2013 – such deductions could only be made from a child’s or protected party’s damages if approved by the court pursuant to CPR 21.12. 

It remains the position that such deductions ?will only be approved if reasonably incurred and reasonable in amount. Previously, the general rule was also that before payment could be made out of a damages award, the court had to order a detailed assessment of costs under CPR 46.4. 

The ‘problem’ of the need for a detailed assessment was tackled by the introduction of CPR 46 practice direction (PD) 2.1. That provided that the court need not order a detailed assessment under CPR 46.4 where there was no need to do so to protect the interests of the child; where another party had agreed to pay a specific sum in respect of the costs of the child and the legal representative had waived the right to claim further costs; and where the court had decided the costs payable to the child by way of summary assessment and the legal representative had waived the right to claim further costs. 

That, however, still left the requirement that a detailed assessment be undertaken where the ‘exceptions’, as outlined above, did not apply. ?This ongoing problem led to a new CPR 21.12(1A) and a new CPR 46.4(5) which came into effect on ?6 April 2015. 

The effect of both the new CPR 21.12(1A) and CPR 46.4(5) is that the costs recoverable in a claim brought on behalf of a child or protected party include a ‘success fee under a CFA or a sum payable under a damages-based agreement for personal injury (PI) where the damages agreed or ordered to be paid do not exceed £25,000’, which is assessed summarily. 

The rule changes do not affect the fundamental position under CPR 21.12 that the success fee can only be recovered if it is reasonably incurred and reasonable in amount. 

The two judgments in A v Royal Mail Group, provided by Birmingham’s regional costs judge, consider in extensive detail the practical application of these new provisions. 

ATE premiums

?DJ Lumb first considered the recovery of the ATE premiums from the children’s damages. In doing so, he made reference to the very low risk profile ?of both claims. Both claimants had been innocent passengers in a road traffic accident and were protected by qualified one-way costs shifting (QOCS). 

In essence, the claimants would only lose their QOCS protection in full, with the effect that the defendant could enforce its costs against them, where the defendant could establish that there were no reasonable grounds for bringing the claims, where the claims amounted to an abuse ?of process, or where the claims had been fundamentally dishonest. 

All of those, as considered by the judge, were impossibilities given that it was uncontroversial that the accident had been caused by the defendant’s negligence and that the children’s occupancy in the car and the causation of their injuries had never been challenged. When asked, the solicitor’s agent acting for the claimant could not allude to any risk that could have justified taking out an ATE policy in either case. 

DJ Lumb held that the ATE premiums could ?not be considered to be a reasonable expense, reasonably incurred, for the purposes of CPR 21.12, and refused to approve the deductions from the damages awards. 

Under paragraph 11.3 of PD 21, a risk assessment must be provided in support of an application for a deduction from a child’s or protected party’s damages. Though the legislation is silent on the need to provide a risk assessment, DJ Lumb held that a risk assessment must always be provided in support of such applications. 

Success fee

?The next point considered was whether a 100 per cent success fee was reasonable in amount and an expense reasonably incurred under CPR 21.12. ?The view formed by the judge was that had a risk assessment been carried out, the prospects of success were so high as to be virtually certain. ?He considered that it was very unlikely that a success fee of 100 per cent could be viewed as an expense reasonably incurred and reasonable in amount for the purposes of CPR 21.12. 

A further problem with the application for the success fee was the fact that the amount of base costs under the terms of the retainer between >>     >> the solicitors and litigation friend had not been quantified. No bill of costs had been delivered to the litigation friend and no indication had been given of the amount of costs he would be liable for under the terms of the retainer. 

The failure to quantify the base costs was significant because, without knowing what the base costs were, the success fee of 100 per cent ?of an unknown figure could not be quantified. 

The solicitors sought to circumvent that failure by relying on the Conditional Fee Agreements Order 2013, which provides that the success fee payable by the client is capped at 25 per cent of the awards for general damages and past special damages. 

Relying on that provision, it was argued that the success fee is automatically crystallised as 25 per cent of the damages award as soon as the court approves the proposed settlement. Plainly that is incorrect: a settlement cannot be approved until the court is satisfied that the proposed deductions are reasonable. 

To justify the recovery of the success fees, it ?was further argued by the claimants’ solicitors that solicitors would not undertake these kinds of cases without the enhancement of a success fee. 

The judge, however, considered that position to be wholly incorrect, holding that advising clients that other solicitors may be prepared to accept instructions without a success fee formed part ?of their professional requirements under the Solicitors Regulation Authority’s Code of Conduct. 

Second judgment

?Because no risk assessment had been undertaken, falling foul of the requirements of PD 21, the judge held in his first judgment that deductions from the children’s damages for the success fees could not be summarily assessed. After the first judgment was handed down, the claimants’ solicitors therefore requested a detailed assessment of the success fees claimed. 

Considering it disproportionate for a full detailed assessment to be undertaken, special directions were given to enable an assessment on paper. The key question for the judge was what amounted to an appropriate success fee to deduct from the claimants’ damages as a reasonable expense, reasonably incurred, ?for the purposes of CPR 21.12. 

DJ Lumb concluded that the appropriate success fee in both cases was 10 per cent of the base costs incurred, referring again to the very low risk profile of both claims. 

Best practice

Though both first instance decisions were made ?by a district judge, the judgments in A v Royal Mail Group set a wide-reaching judicial precedent. 

The expert detail in which the points relevant to applications for deductions from children’s and protected party’s damages awards have been considered means that district judges are unlikely, in my view, to depart from the 10 per cent benchmark for success fees in low velocity passenger claims.  

District judges are now also very unlikely to approve deductions from damages awards for ATE premiums in these types of minor injury passenger cases, given there being no justifiable risks that need to be insured against.  

Like many judgements though, A v Royal Mail ?is fact specific. What is reasonably incurred and reasonable in amount under CPR 21.12 will depend on the facts of any given case. The low velocity passenger claims in this case are very different to the context in which applications might be made for the deduction of ATE premiums and success fees from a child’s damages in, for example, a catastrophic PI ?case involving many more risks for the ?claimant’s legal representatives. 

Certainly, it is unlikely to be long before DJ Lumb’s conclusions come before the appellate courts for determination. 

One important practical question remains to ?be considered: what is the current best practice regarding collected success fees from protected parties? Well, there are a number of points. 

First, it is important not to lose sight of the baseline position that a success fee can only be recovered if it is deemed to have been reasonably incurred and is reasonable. The level of the success fee therefore needs to be justifiable by reference to, among other things, the risk profile of the claim. 

Second, the success fee is calculated by reference to the base costs and not the award ?of damages. The 25 per cent limit is the ceiling ?for a success fee in a PI case as set by the ?Lord Chancellor under the Conditional Fee Agreements Order 2013. The expression of ?the success fee as a percentage of damages ?is a misconception. Where applications for a deduction from the damages for a success fee ?are made, the base costs in the case must be quantified. 

Third, the requirements of PD 21 need to be complied with in applications for deductions. ?This includes providing the risk assessment used to determine the success fee and the advice given by the solicitor to the litigation friend about the funding arrangement chosen. 

District judges will find any excuse not to allow the recovery of the success fee: don’t expect judicial leniency even in the event of partial non-compliance. Similarly, the fundamental requirements under the Courts and Legal Services Act 1990 also need to be complied with.

Matt Waszak is a barrister practising from Temple Garden Chambers @TG_Chambers www.tgchambers.com